mortgage

Can You Appreciate This?

August 15, 2009 By Jon Griffith Leave a Comment

In most instances, real estate increases in value over time. That makes it a great investment. But as you think about your “investment” consider that those who pay cash for their homes, which most people cannot do, realize the greatest return on their investment.

Let’s take a look at the value of a $100,000 home over a period of 15 Years. I use the 15 year mark because I’ve been converted from the 30-year mindset to the 15-year mindset. Thanks Dave!

In this model we’ll set a steady 5% annual rate of return. Take a look at the chart below as it illustrates the annual growth over the 15 year period.

When you’re done paying off the loan, assuming that the property values increase at a steady average, you should see results much like these, where your gain is approximately $98,000.00.

Comparing Cash Buyer to Mortgagor

Obviously the cash buyer’s return on investment is much greater because they have no interest payments, and they may even have residual rental income on top of the increase in value. This is what will put them ahead of inflation.

But what if you do have a mortgage? Let’s say you purchased a $100,000 home with 3.5% down and a 15-Year fixed note for $96,500 (there are also closing costs, but we’ll leave those out for this illustration). Below is a chart that shows you how much it will cost you to borrow that money:

As you can see, over the course of the loan, you will have paid $39,507.42 more for the home than the cash buyer. Subtract that from the increase in value over 15 years and you have a net gain of $58,485.74.

So, what in terms of rate of return is $58,485.74 over 15-Years on an original purchase price of $100,000.00? That’s a tricky equation, but it yields a rate of return of about 1.97% annually. Add inflation of about 3% – 4%, and you’re losing value.

However, after those 15 years, you now have a paid for home, and you can start using your income to reverse the process to enjoy years of compounding interest on your investments.

The bottom line is that in order to really realize the investment power of real estate, you need to pay cash for your home before throwing away years of interest payments to the bank.

That loss of $39,507.42 invested in growth stock mutual funds averaging 10 – 12% annually over a period of 15 years will grow exponentially.

Filed Under: Real Estate Finances Tagged With: cash buyer, compounding interest, interest payments, mortgage, rate of return, return on investment

There Is No Secret To Getting Rich

August 13, 2009 By Jon Griffith Leave a Comment

Think about it. There are thousands of millionaires. Some of them fell into it; some of them worked hard to earn it. Those who worked hard, probably still have it. The most powerful wealth building tool that you have is your income.

When you fill a bathtub, you plug the drain. If you don’t, all the hard work of pumping that water from the well is wasted as the water simply slips away through the plumbing.

There are two ways to change this situation. Increase your income, or decrease your expenses. You have far more control over a decrease in expenses than you do an increase in income, so don’t hope for a raise to get you on track.

So what does the cash flow of a wealthy person look like? That all depends on how you define wealth. Before you can be “rich” you need to adjust your lifestyle so your expenses are less than your income, and you need a clear, written plan.

This isn’t rocket science. In fact, here’s a little chart that I created that outlines a pretty good plan that will place you on the highway to wealth.

Assumptions

You give to your church.
You give as little as possible to the IRS every paycheck and save your annual taxes in your own interest bearing market rate account.
You have ZERO debt, except for your mortgage.
You have 3 to 6 months total expenses saved up for emergencies.
Your salary is around the national average of $50,000.00
Your mortgage payment is no more than 25% of your take home pay and is a 15-year fixed mortgage.

Based on the assumed $50,000 annual income, your monthly gross income is $4166.66. You make enough to land you in the 25% tax bracket. Your tax bill for the year at $50,000 will be about $8,688 or $724.00/month.

So, after taxes, you’re left with $3442.66 every month. What are you going to do with it?

The key to following this model is applying it to whatever income situation you are in. Whether you make $25,000 or $90,000. Granted, your tax bracket will change the calculations, but the model should remain the same. If you are unable to do this, then you may have an income crisis, or you’re spending WAY too much money on things you don’t need to be spending money on.

This model is obviously a guideline, and can be modified to suit your particular situation. I’d love to hear your thoughts on this and why you may agree or disagree with the structure. Spending in this country is out of control, and there’s a serious lack of financial discipline being exercised in our lives. Writing out a plan for your money, such as this, will help open your eyes to what you really can and cannot afford.

Filed Under: Living Debt Free, Personal Finances Tagged With: budget, Cash, cash flow, mortgage, Rich, spending, wealth

A Short Sale Will Save Your Credit

July 22, 2009 By Jon Griffith 1 Comment

When you cannot pay your mortgage because it is out of your reach due to adjusting rates, pay reductions, job loss, etc., then it’s likely you have been inadvertently placed on a track that will lead to foreclosure.

Foreclosure occurs when the bank takes your home back because you went too long without paying them. They do this because their money is tied up in your home, and you’re no longer profitable for them. The last thing a bank wants is to own your home. What they want is steady cashflow because they make money when they lend your cash to other banks. If they don’t get paid, they take your house, then they auction it off, and then they come after you for the difference.

The Auction

When the home is sold at auction, it brings less than market value, typically. This means that there’s a deficiency that you are responsible for. That’s the amount that you still owe on the mortgage above and beyond what the home brings at auction. Ultimately, this could lead to a law suit, a judgment against you, and some sort of lien or wage garnishment. Either way, the bank will come after you.

In the process, you lose. Your credit is destroyed, and you’ll be unable to borrow money for five to seven years. This is a bad thing.

The Short Sale

If you are headed down the road to foreclosure, consider attempting to sell the home before the foreclosure happens. In the housing industry, this is called a short sale, because you’re going to be asking the bank to accept less for the home than you owe. You’ll be short the extra cash. IT DOES NOT MEAN IT HAPPENS FAST. “Short” does not refer to the amount of time it takes to get approval from your lender to do this.

Why Sell Short?

Why the hell not? You’re going to foreclose, which is horrible for your credit, so why not attempt to reduce your deficiency by selling the home before the bank gets its hands on it. The lender is going to sell the home for less than market value, and there are attorney’s fees attached to it which means your liability after all is said and done will be greater than if you had a a REALTOR, someone like myself, list your home, market it, and get it sold for as much as possible.

We Don’t Choose Between Foreclosure and Short Sale

100% of the homes that are foreclosed upon have a mortgage. ALL homes that are headed towards foreclosure can be sold short of what is owed. When we speak of Short Sales, we aren’t comparing them to a Foreclosure and then choosing the best option. If you don’t pay your mortgage, you are on a time line of foreclosure.

A recent caller to the Dave Ramsey show had the idea that a “Short Sale” was a process applied to a financial hardship that was different than foreclosure. Here’s the difference. A foreclosure is the result of complacency. Don’t pay your bill, and your bank will boot you out of your house. A short sale is what you do to prevent a foreclosure, if you are unable to pay your bills.

A Short Sale Will Not Hurt as Much

It’s true. If your home is worth less than you owe, whether you can afford the payments or not, if you have to sell it, you have to sell it for less than is owed. If you don’t have the money to cover the difference, you will be required to get approval from your lender to release the home to a new owner. YOU HAVE A MORAL OBLIGATION TO PAY YOUR MORTGAGE PAYMENT. Walking away from the house is a breach of contract. Asking the bank to allow you to sell for less is not. The consequences to your credit, and your tax bill when you ask your lender to forgive you of the remaining balance after you have an offer on your house for less than you owe will make the difference between having a foreclosure on your record, with an inability to borrow for up to 5-7 years, and the ability to borrow within 2 years.

Don’t be a fool. If you’re headed towards foreclosure, try to sell short before the auction date. Your outcome will be much better.

Filed Under: Real Estate Basics, Short Sales Tagged With: banks, foreclose, foreclosure, judgment against, law suit, mortgage, short sale, wage garnishment

Arizona Anti-Deficiency Laws Are Changing

July 16, 2009 By Jon Griffith 3 Comments

The following information was provided by Marc McCain, Attorney at law, regarding the changes that are coming regarding the Arizona Anti-Deficiency legislation.

A deficiency is the amount that you still owe the bank after the bank forecloses. If you are selling your home short of what you owe, or you are about to experience a foreclosure, then this information is important for you. As always, please seek professional legal council when it comes to your particular situation. I can help you sell your house, but I’m not an attorney. We leave that up to the legal experts.

Arizona’s anti-deficiency laws are changing effective September 30, 2009!

The change is designed to limit the type of borrowers that will qualify for anti-deficiency treatment. Set forth below is a general outline of Arizona law regarding when a borrower may be subject to a deficiency action or sued on its note following a foreclosure or short sale. However, borrowers must understand that these are only general rules — every situation must be analyzed carefully based on the specific facts – consult with a professional at all times to determine your rights and obligations in connection with a foreclosure or short sale.

In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. § 33-721
If the foreclosure price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the difference. However, certain states, including Arizona, have what are called anti-deficiency laws that bar a lender from seeking a deficiency in certain situations.
In determining if anti-deficiency rules apply, the first step is to confirm what law applies to the loan, particularly the lender’s remedies under the Promissory Note. The applicable law should NOT be assumed. Read your Promissory Note and other loan documents carefully and understand their terms.
Assuming Arizona law applies to the lender’s rights under the Promissory Note, Arizona’s anti-deficiency laws are found in 2 places – in A.R.S. § 33-729(A) (regarding judicial foreclosures), and A.R.S. § 33-814(G) (regarding trustee’s sales).
In both judicial foreclosures and trustee’s sales, anti-deficiency rules apply only if the property being foreclosed meets the following criteria: (a) 2½ acres or less; and (b) limited to and utilized as a single one-family or single two-family dwelling. However, on July 10, 2009 Governor Brewer signed into law a change to A.R.S. § 33-814(G) which will take effect September 30, 2009. In addition to the above requirements, the trustee’s sale statute will also require that: (a) the trustor has lived in the property for at least 6 consecutive months; and (b) a certificate of occupancy has been issued. Until September 30, 2009, there is NO requirement that the trustor use the property as a residence – residential investment properties satisfy the anti-deficiency criteria. Effective September 30, 2009, investment properties sold at trustee’s sale will NOT qualify for anti-deficiency treatment if the trustor has not lived in the property for at least 6 consecutive months. Commercial properties and loans secured by residential homes being developed for sale but never used as dwellings don’t qualify for anti-deficiency treatment. In addition, a deed of trust that is a lien against more than one property will not be subject to anti-deficiency rules — the deed of trust needs to be a lien against a single trust property.
A.R.S. § 33-729(A) also requires that the loan be a purchase money (“PM”). However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan. A PM loan doesn’t lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
In a judicial foreclosure, only a PM lender on qualifying residential property is prevented from seeking a deficiency; a nonpurchase money (“NPM”) lender is not – it can obtain a deficiency following a foreclosure or sue the borrower on the note.
In a trustee’s sale, both PM and NPM lenders that foreclose on qualifying property are prevented from seeking a deficiency and from suing directly on the note.
Junior liens extinguished by a 1st position foreclosure may be able to sue on the note. The issue is whether the junior loan was a PM or NPM loan – if it was a PM loan on qualifying property, the lender can NOT sue the borrower on the note following the foreclosure; if it was a NPM loan, the lender CAN sue the borrower.
If a lender can not seek a deficiency, then the lender can NOT waive its security and sue directly on its note. This means that a lender under a PM loan on qualifying property will NOT be able to sue the borrower on the note. This rule also applies to short sales. Note there are gray areas regarding cash out refi’s. Other Lender claims are also not barred – e.g. mortgage fraud.
Even if anti-deficiency rules apply, a borrower will be liable to a lender for any diminution in value of the trust property due to voluntary waste. In other words, don’t damage the property, take fixtures, A/C units, etc., or let the Property go to waste.
Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
Last, but not least, consult with qualified tax professionals BEFORE deciding to do a short sale or foreclosure. 1099 income, gains, losses and other tax consequences may result from foreclosures, short sales and loan modifications. Know what tax consequences you will face and plan accordingly.

Filed Under: Blah Blah Economy, Market Updates, Real Estate Finances Tagged With: applicable law, foreclosure, information, legislation, mortgage, short sale

It’s a Bottom Line Issue

June 19, 2009 By Jon Griffith Leave a Comment

A recent post on raincityguide.com got me going about the bottom line when it comes to short sales.

The article, written by Ardell, touches on the apparent importance of the assets that a property owner may have that could affect the bank’s decision regarding whether or not a short sale will be approved.

At present, there’s no guarantee that any lender will approve a short sale, ever.

Just because the value of a property is obviously less than the amount owed, that does not mean that the seller’s lienholder is going to approve the short sale.

Consider this. If a property owner has a net worth of $1,000,000.00 and they decide to quit paying their mortgage, what happens? The bank forecloses. It doesn’t matter if the seller has money or not. They have made a decision to walk away, and one thing is certain…if you have a home with a mortgage and you quit paying it, the bank will foreclose.

So, when this seller, who arguably is walking away from a moral obligation, decides to attempt to sell the property to reduce their potential deficiency liability and potential income tax liability for current market value, which may be less than what they owe, would it, or would it not be in the bank’s best interest to allow the short sale? If they don’t allow it, will they waste money on the foreclosure process, and lose money when they list it for sale for less than market value? They will.

Ardell’s Auto Metaphor

You lend your friend $10,000 to buy a car. He decides to sell it when he still owes you $8,000. He tells you someone is willing to pay $5,000 for the car and he wants you to take $5,000 as payment in full. You look at his offer, you find out he he has $15,000 in a savings account. You find out the blue book value for the car is $6,500. The person who wants to buy the car for $5,000 is getting impatient wating for an answer. What would you do?

My answer? It doesn’t matter to me whether or not my friend has money in the bank. The only thing that matters to me is how much the car is worth on the open market, and how much is being offered.

The what you may be missing about this example is the fact that my friend has made a decision to eliminate a debt, and he’s going to do it one of two ways…he’ll either a) let the car get reposessed, or b) try to sell it for as much as he can and ask for a forgiveness of the remaining debt. True, he may no longer be a friend, but that’s what he’s doing.

So, what do I do? Well, in this case, the car should sell for $6500.00 based on Kelly Blue Book private sale. I as the lender now have a few options. I can a) take the car back, or b) agree to sell it for the offering price, or c) require that my friend find a buyer willing to pay market value.

Perhaps the cost of repossessing the car, reconditioning the car, licensing and registering the car, and re-marketing the car will exceed $1500.00, the difference of market value and the current offer. In that case, I would be an idiot not to take the offer. I as the lender, will make smart decisions in mitigating my loss, which means that I would in fact approve the sale.

If all of my costs to resell that car are less than $1500.00, then I would deny the sale and require a higher price.

Should you just take the car and try to sell it for the $6,500 or better, so that you can still collect the amount your friend owes you after you sell the car?

This is a classic example of the tug of war that we face with lenders between the concept of Loss Mitigation and Collections. At this point, I’m not interested in collecting. I’m interested in preventing further loss, because I know that my friend is not going to pay. So, I want to get the car OFF of my books as quickly as possible for as much as I can possibly salvage with as little time invested as possible.

If I am concerned with collecting, knowing that my friend has the money to satisfy the debt, I will surely become bitter at him for not paying, and then I will do something stupid, like refuse to agree to mitigate my loss, which in the end will eat up time and energy, and money. Give me my $5000.00, get the headache out of my life, and let me put that money somewhere it can begin earning again.

Is it possible to short sell more than one home of the same owner who has plenty of money in the bank but has chosen to walk away from their obligation? Yes. Is it right for them to walk away? That becomes a moral question that the seller would have to ask of his self.

Bank executives understand loss mitigation, and they don’t care about each person’s personal financial situation. They care about 3 things and 3 things only.

Is the owner walking away from the property?
What is the market value of the property?
What is the current offer?

Anything else has zero bearing, from the bean-counter’s perspective.

Some second lenders (junior lien holders) will hold up the sale of a property because they just want to get back at the seller for not paying. This is a ludicrous path to follow, because it gains them nothing. If the senior lien holders were to behave the same way, then ultimately they lose more than if they allow the short sale.

Do lenders have to approve short sales? No, they do not. Would it be better if they did? Yes, but only if it means avoiding foreclosing on the property, which is something that the bank cannot prove the owner has actually decided to allow.

Filed Under: Bank Antics, Personal Finances, Real Estate Finances, Short Sales Tagged With: cost, current market value, mortgage, Perspective, short sale

Is There A Benefit to Foreclosure vs. Short Sale?

June 3, 2009 By Jon Griffith 5 Comments

When you consider the fact that whether or not you are able to sell your home before the bank forecloses, the bank will eventually foreclose if you don’t pay your mortgage, it would be beneficial to you to at least attempt to sell the home before that happens.

It’s really not Foreclosure vs. Short Sale

There’s no competition here. There’s no “one way is the right way” scenario. The bottom line is, once a homeowner stops paying their mortgage, they are headed for foreclosure. A short sale can be conducted at any time prior to foreclosure. You do NOT have to be behind on your mortgage payment for a competent real estate agent to negotiate with the bank to allow you to sell your home for less than you owe. If you are headed for foreclosure, there’s absolutely NO disadvantage to attempting a short sale. In fact, there is a benefit.

Banks Pay Big Bucks to Foreclose

That’s right. When the bank reposesses your home, they spend money to do so. The hire attorneys to handle mountains of paperwork and they have costs associated with conducting a trustee sale. Then, when all is said and done, they have to hire a real estate broker to list the home for sale, which will cost them additional fees.

Who Makes Up The Difference

Let’s say you purchased your home for $150,000 and over a year’s time it increased in value to $200,000 and you decided to take out a $50,000 equity loan based on the current value. The market values fall and now you find that the house is worth $160,000 and you’re upside down by $40,000.00. You fall on hard times and can no longer afford payments on your combined mortgages of $200,000.

When you owe $200,000 on your home, and the bank forecloses and sells the home for $160,000 it is you who are responsible for the difference. Since Arizona is a non-deficiency state, the bank will probably write it off. However, and keep in mind that I am not a tax expert, if the $50,000 you pulled out of your house was not used to invest in that house, and instead it was used to invest in something else, like another house, or a vacation, or a car, then you’re in a sticky situation. The bank may come after you, because that loan was probably tied to you with a personal guarantee.

Whenever a bank writes off a deficiency from a foreclosure or a short sale, they issue a 1099-C so they can show the IRS that they have a loss. This 1099-C is an income statement for you and it must be reported to the IRS. If your financial situation meets certain criteria, then you may be able to deduct that same amount from your tax return and thus not owe any taxes on it. If, however, you do NOT qualify, you may find yourself paying income tax on the deficiency. So it would make sense to reduce the liability as much as possible.

Sell It Short

The best way to reduce your potential liability is to give your local real estate expert an opportunity to sell your property BEFORE it forecloses. Look, the property is headed for foreclosure anyway. The banks know that it costs them a fortune to reposess homes and sell them at auction, so they are much more likely in economic times such as these, to allow you to sell it BEFORE they incur those expenses. Rather than pay the attorneys, the bank agrees to pay the real estate expert, and saves a bunch of money. Bank owned properties sell for less than properties that are selling short, and that translates to a smaller deficiency, and less reported income, saving you potential tax dollars.

Don’t simply walk away without giving your local real estate expert the opportunity to help both you and the bank save some money. And guess what, it helps them out too, because that’s how they feed their families.

Filed Under: Featured, Personal Finances, Short Sales Tagged With: broker, equity, foreclosure, mortgage, opportunity, short sale

Get In While the Getting Can Be Gotten

October 8, 2008 By Jon Griffith Leave a Comment

You’re renting?

The only thing that stands between you and owning a home is whether or not you have the cash flow every month to make your payments on all of your financial obligations. Set aside your worries about credit scores and focus on whether or not you can pay your bills. If you can, and you have a good job, and you can prove solid income with a low debt to income ratio, then you can buy a house. Quit listening to what the media is telling you and start consulting with those who know ( ) what’s really going on.

Does buying a house mean taking on more responsibilities? It can, but the key in these economic times is to just buy something. Buy a condo, buy a townhome, just buy something.

Dave Ramsey recently read a letter from a listener in which he stated…

Why is it that when stores put items on sale everyone runs to get the best deals, but when stocks are on sale, everyone runs for the exits?

To that Dave responds with enlightening information (as though we don’t already know this) about how stocks and real estate are on sale. They’re on sale everyone! SALE! The market reflects pricing from 2004 and the slight downward over correction we’re seeing on that pricing is normal. Over time, these prices will increase.

Pricing this low means one thing. Homes are at a bargain discount right now and you need to take advantage of that.

According to a recent article released by the National Association of Realtors, Lawrence Yun, chief economist for the NAR said the following:

“What we’re seeing is the momentum of people taking advantage of low home prices, with pending home sales up strongly in California, Nevada, Arizona, Florida, Rhode Island and the Washington, D.C., region,” he said. 2 “The improvement also reflects the drop in mortgage interest rates after the government takeover of Freddie Mac and Fannie Mae. It’s unclear how much contract activity may be impacted by the credit disruptions on Wall Street, but we’re hopeful most of the increase will translate into closed existing-home sales.”

Rather than shopping for a bargain while prices are low, people are retreating from any major purchase, cowering in a corner and proclaiming ridiculous statements like

“Well I hope the President has a plan to fix this…”

Guess what…fat chance. The only person who has control over your financial future is you, and if you’re smart about managing your money, you’ll start shopping for a home now, because one year from now it will cost you more to get in.

Yun also states that

Following national declines of 5 to 8 percent in 2008, home prices are projected to increase 2 to 3 percent next year.

The 30-year fixed-rate mortgage will probably average 6.1 percent in the fourth quarter and rise gradually to 6.6 percent by the end of 2009.

Now is the time to buy that single family detached home you’ve been afraid of purchasing. There are thousands available on the market, and many of them are in the extremely affordable $125,000 – $200,000 range. A mortgage of this size will cost you around $750 – $1200 /month. I would bet you’re paying that in rent and when you rent, you’re losing it all.

It’s more clean than ever. It’s time to get in while the getting can be gotten.

Call me about buying a home today. (602) 312-3262

Filed Under: Blah Blah Economy Tagged With: buying, cost, home, mortgage

Everyone Thinks it’s the Housing Mess

September 17, 2008 By Jon Griffith 1 Comment

Article upon article today blame the housing mess for causing the financial hardships we’ve seen reported over the past week. Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Merrill Lynch…when does the finger pointing stop?

The housing crisis is not the root of the troubles that we are facing today. A combined effort between greedy lenders and reckless buyers is what led to the housing mess we’re in. I don’t see any way to point the finger at anything more than greed. We in America have set aside all common sense and have extended ourselves way beyond what we know we can handle. Being in debt is being in prison. The more money you spend that you don’t have, the longer it will take to get out of where you’re at.

There is, in my opinion, a healthy way to become a home-owner. Spend less than you make, create a budget, and save. If you don’t agree with me, that’s okay, but I will lay out a quick and simple example of what I think a healthy distribution of your income could look like based on a $3000/month net income (after taxes.)

$3000.00

$-300.00. 10% giving back to the community in some way, shape or form, whether charitable contributions or to your church or through donating your time and resources.

$2700.00 Balance

$-300.00. 10% tucked away in a 401K or other savings plan.

$2400.00 Balance

$-1000.00 or 1/3 of your income to cover housing costs (rent/mortgage). This puts you in a home around the $120,000 mark if you plan to purchase.

$1400.00 Balance left over for the rest of your living expenses, auto, insurance, etc. Some of this is discretionary and some of this is not. Whatever you have left over, contribute towards a down payment fund and save, save, save, until you have enough to begin owning a home.

This model assumes you have no debt. If you have debt with interest rates that are higher than the investments you currently have, eliminate the debt and get on the right track, because even though you may think you’re saving, you’re actually losing money in the long run. Credit card debt is a cancer and will destroy your financial future.

I’m not a financial planner, but I do try do employ common sense when dealing with my income. Since I am in the sales industry, my income depends on each sale. If I don’t sell a home, I don’t eat. In this unique market where you, the buyer, hold the negotiating chips, with interest rates as low as they have been since before the housing crisis became a common topic, it’s time to buy and I can help you.

Please contact me today for more information about becoming a first time home buyer or about selling your current residence and moving to another location.